An alternative GHG analysis

The Government no longer needs to look for an alternative to its ETS proposal. We now await the Bill.

To see a more comprehensive calculator with multiple variables,

Background to an Alternative Proposal

Introduction

This accompanying analysis was undertaken in an effort to highlight the financial implications of the various Greenhouse gas emissions reductions targets suggested. The conclusion is that all the emissions reduction targets are feasible. However we believe that this can only be achieved with a re-think as to the mechanism(s) by which the reductions are encouraged and achieved in a way that is most advantageous to the NZ economy. This and the next page give some background and a suggestions as to how an appropriate outcome may be achieved. The third page is a calculator giving an analysis of various scenarios based on some user-definable variables.

Background

NZ has ratified the Kyoto Protocol and is bound by its provisions, albeit that the full implications of a number of those provisions have only become clear since the document was signed.

There had previously been a suggestion that NZ was going to be a world leader in the reduction of Greenhouse gas emissions with minus 100% as a credible target. This aim choose to ignore the fact that the production of over 40% of the country's export earnings ($17.2 billion) causes nearly 50% of CO2e emissions, largely by way of animal emitted methane (with global warming potential (GWP) 21 times that of carbon dioxide).

The other major cause of GHG emissions is the burning of fossil fuels such as petrol, diesel, gas and coal. Industrial processes, waste and fertiliser applications, particularly nitrogen, are also contributors.

It is generally accepted that NZ has to "pull its weight" in GHG emissions reduction however any contribution needs to be seen in relation to the global problem. If NZ adopted a minus 40% target, the savings would be the equivalent of just over 2.5 days of the USA's GHG emissions. NZ is never going to save the world.

Having said all this, we need to consider the mechanism by which meaningful reductions in net emissions can be achieved. The significance of "net" in the is that under Kyoto, mitigation is a recognised means by which reductions in emissions may be achieved. This can best be attained in NZ by growing more trees to sequester greater volumes of carbon via the photosynthesis process. [Just over 25% by weight of a tree is carbon with Pinus Radiata having an average density of approx 470kg/m³. One kg of carbon takes 3.67kg of CO2 out of the atmosphere.]

One of the major reasons that the full financial impacts of various policy scenarios have been so difficult to quantify is because of the focus on sectors rather than on the sources of emissions.

The Analysis Summary shows the price impact of four key variables on four reductions targets, -10% -20%, -30% and -40%. There is also the ability to see the impact on energy prices if ALL mitigation costs are recovered via price increases for energy. [While there is an argument that the mitigation of base animal emissions, (for the purposes of this proposal, restricted to those that cannot be eliminated) could be recovered in this way, the costs of achieving emissions reductions/mitigation from industrial processes, waste and fertiliser application should rest where they lie. The analysis option is merely to illustrate the economic impact.]

An Emissions Trading Scheme

There have been various attempts to create "markets" in goods and services everyone understands but some have not been successful. Take electricity for example. A recent report suggests price gouging of billions of dollars. How a theoretical global market is going to work when the rules in each country are, in some instances, fundamentally different, is anyone's guess.

The belief that a "market" can be created for trading a "carbon credit" is at best ambitious. For a start, a "market" presupposes that it will be free from interference. That is impossible for this market because of the vested interests involved in making the rules in the international forums. And then there is the involvement the financial institutions. [Did the oil producing countries ever push prices to $US160 plus/barrel or was it the speculators? The same could happen with emissions credits tp the detriment of the market.]

In a few years the situation will no doubt be clarified one way or another. In the meantime NZ has to grapple with devising a mechanism that is going to deliver on the claims that have been made for its position on climate change and its commitment to reduce net emissions.

The Essentials for a Solution

Because of the profile of NZ's emissions, with farmed animals accounting over 40% of exports and nearly 50% of CO2e emissions and the fact that there is only limited potential to reduce transport and freight related emissions, a proportion of the emissions reduction solution needs to be funded by everyone. The proviso must be however that no group is being disproportionately impacted to the point of financial hardship. The best use of any mitigation charge is to purchase sequestered carbon backed emissions credits from within NZ rather than buy credits on the international market.

The Role of Forestry in a NZ Solution.

While there are various ways GHG emissions credits can be generated under Kyoto rules, the only one that is of unquestionable value relates to carbon sequestration in trees. You can see it, touch it and therefore verify it. Because NZ has plenty of land on which trees can be grown, this should be the focus of our mitigation.

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In quantifying the risk of "carbon farming", the problem stems from the fact that if the market for emissions credits survives, it is highly likely that the average sales price will be exceeded by the price a land-owner will have to pay to cover the harvest emissions, albeit that in the year of harvest the emissions credit purchases will be less than the volume sold. However there are emissions for which purchases must be made for several years after harvest.

Example - Southern North Island: (Per hectare)

The light green cells are user-definable.

Alternative re-purchase price

Years

Credits sold (purchased)

197

145

146

130

113

-467

Price - Increase pa

After tax @

Net proceeds ($000)

Total Offset

Total net proceeds

Harvest emissions purchase

Post harvest emissions purchases (roots, residual etc above ground) after year 30 price.

NET CASH

The cashflow from the sales of forest carbon credits needs to be invested for the harvest re-purchase, especially if the land-owner does not have a substantial interest in the harvest. The income/ha can be calculated below:

Real interest rate

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A more likely scenario is that the carbon prices will be random. Set the low at

& high at

with the

range increasing by

per year. The after tax proceeds would therefore be as follows:

Alternative re-purchase price

After tax proceeds per tonne

Average net sales proceeds

Press the Recalculate button above to see various outcome scenarios:

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If the land-owner is also the owner of or has an interest in the harvest proceeds, that obviously makes a difference in terms of the overall investment performance. However market conditions for logs and the unknown price of emissions credits at the time of harvest are significant business risks. They need to be understood.

| Background | Analysis Summary |

Introduction

Below is a simplified version of the analysis previously found at this address. To look at the detailed analysis behind these figures and to provide greater scope for examining the implications of various other scenarios, click on the link below.

The Analyzer

Analysis of the costs associated with various Greenhouse Gas reduction scenarios.

The whole GHG debate has been skewed by the fact that there has been inadequate information about the real implication of various policy scenarios. Part of the problem is the focus on sectors rather than on the sources of emissions, ie fossil fuels, industrial processes, decomposing waste and farmed animals. NZ is unique in the world regarding the significance of the contribution to CO2e emissions attributed to methane from farmed animals [deemed to be 21 times more harmful than carbon dioxide in Global Warming Potential ("GWP") terms]. However there is no known cost effective technology to reduce these emissions. For farming pay to mitigate this in full, most farms would be uneconomic. Emissions that are controllable by better management should be the responsibility of those responsible for the resulting emissions.

This analysis looks at the cost of achieving the required emissions reductions by way mitigation in the form new forest planting.

In undertaking the analysis along the lines indicated above, we found that the Ministry for Economic Development had figures on its website for fuel, electricity and gas deliveries to March 2009. We therefore created a model with these as a starting point. The objective was to see what energy price increases would actually be necessary to meet various emissions targets. The results were surprising.

Our analysis shows that figures such as $1.20 per litre price increase for petrol (suggested by a respected economist) as a result of signing up to significant emissions reduction targets is simply rubbish. It shows that at minus 100% target with emissions credits at $200, the mitigation costs for petrol would be just over 42c per litre and electricity 3.3c per Kwhr.

Obviously it depends on your assumptions but

Definable variables:

Emissions unit price

Animal emissions covered by energy charges

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See what happens if other emissions are also?

Reductions target

Minus

10%

20%*

30%

40%

Unspecified savings (eg technology, management, etc)

(The units in these 2 sections are millions of tonnes of CO2e)

Target components

GHG reductions required (by way of reduced emissions or mitigation):

Animal emissions

Energy

Waste, industrial, etc

Total

Model cost re farmed animal emissions of mitigation

Model cost to energy of mitigation

Model cost to other emissions of mitigation

Total model cost of required mitigations

Price increases required to mitigate emissions

Power per Unit (Kwhr)

Gas per Mwhr (x 278 for $/Gj)

Petrol per litre

Diesel per litre

Impact on CPI

Total mitigation forests required (000 ha)

Required if overseas emissions purchases cover

Transport cost increases $/tonne/100 km

Based on a truck carrying 18 tonnes using 25 litre of diesel per 100km, excl GST.

* 20% is the upper figure of the Government's announced minus 10% to 20% target range.

Contact: model@valueaddpartners.com